During its peak years, financial investment houses and banks reap profits at the expense of the “real economy” and the people. When they experience losses, history shows that it is the people, through their taxes, who carry the burden of rescuing them with the government’s bailout plans.
BY BENJIE OLIVEROS
The rejection by the US House of Representatives of the $700 billion bailout plan proposed by the Bush administration September 30 shook financial markets all over the world. It further exposed the vulnerabilities of financial markets and the extent of the crisis, which is affecting not only the US but all centers of capitalism, as well.
Stock markets all over dipped with the US dropping by 7 percent, Japan 4.12 percent, Britain 3 percent, Germany 1 percent and France 0.20 percent. In the US alone, $1 trillion was wiped out.
France, Belgium, and Luxembourg had to infuse $9.2 billion to Dexia to prevent it from folding up. Dexia is a retail bank with 5.5 million customers in Belgium, Luxembourg, Slovakia and Turkey, and offers financial services at the global level. It is the first global player on the local public finance sector. Earlier, Belgium. Luxembourg, and the Netherlands infused $11.2 billion to Fortis. Fortis is an international provider of banking and insurance services. It has a presence in over 50 countries, employing more than 65,000 people. It is ranked 19th in the world in terms of assets, 14th in revenues, and 88th in profits. In 2007, it had an income of 120 trillion EUR and a profit of 3.994 trillion EUR.
The US Congress received pressures from all over the world. The US Senate subsequently passed the proposed measure October 1 after adding some sweeteners: $110 billion in tax breaks for business and the middle class, and a provision increasing the cap on federal deposit insurance from $100,000 to $250,000. These sweeteners reportedly softened opposition to the bailout plan at Congress, with the House to vote again on the proposed measure.
If the proposed $700 billion bailout plan is so critical in preventing the financial sector and the US economy from plunging deeper into recession, why was it initially rejected by the US House of Representatives? Why does it have to be “sweetened” before being passed by the US Senate?
The controversy surrounding the measure stems from the fact that while the American people are losing their homes and their jobs, the Bush administration intends to rescue ailing banks and financial investment corporations by buying their bad debts. According to data gathered by Paul Quintos of the Ecumenical Institute for Labor Education and Research, around 2.2 million households are facing foreclosures and 10 million households already owe more on their homes that its worth. Unemployment in the US has reached 6.1 percent in August and the private sector has shed 760,000 jobs since the beginning of the year.
Why would the American people who are already suffering from unemployment and high prices, and are experiencing difficulties in paying mortgages and credit card debts shoulder the burden of saving these banks and financial investment houses through their taxes? Why would the Bush administration spend billions in saving these banks and financial investment houses while ignoring the plight of the millions of Americans who are about to lose their homes?
The logic of the Bush administration is that the bailout plan would restore confidence in the financial markets, ease up credit, reinvigorate stock markets, and eventually generate jobs.
But history shows that bailout plans benefiting the financial sector hardly impact on the unemployment situation. During the heyday of the finance sector, when they reaped enormous profits -while the country suffered from recession- during the early 80s, the unemployment rate in the US was hovering around 7 percent, even reaching 9.7 percent in 1982. It improved slightly in 1987 when unemployment went down to 6.2 percent. But by November of that year, the stock market crashed. A $500 billion bailout package was implemented after the stock market crash in 1987. Unemployment hardly improved hovering at around 5.6 percent after that, while the stock market became bullish once more with the value of stocks of high-tech companies soaring. The employment situation improved only by 2000 with unemployment registering a 4 percent rate until the dot com industry collapsed that same year.
Financial markets had their heyday once again with the trade in asset-backed securities called collateralized debt obligations (CDOs) while unemployment hovered around 5 to 6 percent. The employment situation in the US improved again only in 2006 when unemployment went down to 4.6 percent; by then, the subprime mortgage crisis was starting to unravel.
Rather than making taxpayers pay for the losses of banks and financial investment houses, alternative solutions were put forward. One was put forward by Howard Zinn, Emeritus Professor of Political Science at Boston University. In his article, From Empire to Democracy, which was published by The Guardian UK and Truthout, Zinn proposed that the US federal government declares a moratorium on foreclosures and help people pay off their mortgages. At same time, he proposed, a federal jobs program to guarantee work to people who want and need jobs.
Senator Bernie Sanders, on the other hand, proposed that the bailout be financed not by the working people but by “those people who have caused the problem, those people who have benefited from President Bush’s tax breaks for millionaires and billionaires, those people who have taken advantage of deregulation…” Sanders proposed a five-year, 10 percent surtax on families with incomes of more than $1 million a year and individuals earning over $500,000. He also concluded that it is the deregulated regime that enabled the financial sector to create “complicated and unregulated financial instruments” worth trillions of dollars in bloated value.
But of course, the independent senator’s proposal was promptly turned down as it does not sit well with the administration, and both the Republicans and Democrats.
The $700 billion bailout plan would likely be approved. (The House of Representatives is set to vote on the amended bailout plan, which is based on the Senate version, as of this writing.)
What can be concluded from the current financial crisis?
Speculative investments began to intensify after recession plagued the US economy and the rest of the world in the mid-70s.
The growth and intensification of speculative investments was and is still being fueled by the deregulation, liberalization, and privatization regime, which was pushed by Ronald Reagan of the US and Margaret Thatcher of the UK in the 80s. The liberalization and deregulation of financial markets all over the world resulted in unbridled profits for banks and financial investment houses, while privatization provided additional fields of investment for the recession-constrained real economy.
In the process, banks and financial investment houses have become so big and dominant, and that they have been reaping profits at the expense of the “real economy” and the peoples of the world. Data gathered by Quintos revealed that in 1980 the bloated value of the world’s financial stock was roughly equal to the world’s GDP; by 1993 it is double the world’s GDP; by 2005, it had risen to 316 percent or more than there times bigger than the world’s GDP. In 2004, trading in derivatives such as CDOs amounted to $5.7 trillion daily, while trading in foreign exchange amounted to $1.9 trillion a day. These are just two types of speculative or portfolio investments, which do not yet include the value of trading of stocks, commodity futures, treasury bonds, among others.
And when they experience losses, governments are wont to rescue them with taxpayers’ money as what it did in 1987 and 2000. It is then the people who carry the burden of the crisis caused by the corporate greed of financial investment houses and banks.
The Philippines has not and will not need to come up with bailout plans. To begin with, it has no resources to do so because of its backwardness and perpetual trade deficits. But it is no less vulnerable to the profiteering ways of financial investment houses and banks. The country had a taste of the extent that speculative investments can wreak havoc on the economy during the 1997 Southeast Asian financial crisis. The Philippine peso, which was valued at P26 to the US dollar in 1996, was never able to regain its value since then.
The Ramos government, like the current Macapagal-Arroyo administration, was adamant in rejecting the calls of the Filipino people to institute capital controls and to reverse the policies of liberalization, deregulation, and privatization.
Currently, the Macapagal-Arroyo administration has been rejecting the same demands even as the privatization policy has resulted in the soaring rates of basic utilities; the deregulation regime has spurred the manipulation of prices of petroleum products by oil companies; and import liberalization has caused the bankruptcy of Filipino businessmen and farmers alike.
The Filipino people also carry the burden of the crisis caused by the country’s backwardness and perpetual trade deficits. The Philippine economy is being propped up by remittances of overseas Filipinos as well as the taxes that the people pay. That is why the Macapagal-Arroyo administration has stubbornly refused to remove the VAT on petroleum products even during the peak of the spike in oil prices.
Like the American people, the Filipino people could not rely on the government to implement solutions that would mitigate their sufferings. It is up to them and to us to carry out solutions that would address the crisis head on comprehensively and that would result in the betterment of the lives of the people. (Bulatlat)